Not so wonderful: New federal rules discourage old-fashioned, hands-on style of banking

FOR USE WITH FEATURE PACKAGE FOR SUNDAY, DEC. 1--James Stewart, left, Thomas Mitchell, right, and Donna Reed appear in the 1946 movie "It's A Wonderful Life." After 50 years, ``It's a Wonderful Life'' has yet to outstay its holiday welcome. As sure as egg nog and overspending, the Frank Capra film is woven into America's yuletide experience. (AP Photo/Files)

THE ECONOMIST

November 29, 2013, 10:12PM

11/29/2013

Bankers have a rough time of it in Hollywood on the whole. Back in 1946, however, "It's a Wonderful Life" depicted the Platonic ideal of a small-town bank, with managers and customers who knew each other and tried to help each other through tough times. George Bailey (James Stewart) was the banker we all wanted to have, and still is.

Most banks pay lip service to such goals, but fall laughably short of them in practice. Marquette Savings Bank, the last remaining lender headquartered in the once-booming industrial city of Erie, Pa., could make a more plausible claim than most ... until distant regulators and policy-makers undermined its personal approach.

A visit to Erie in the months before Christmas reveals two different economies. Canadian shoppers fill the local malls to take advantage of Pennsylvania's lack of sales tax on clothes. Meanwhile high corporate taxes and demanding trade unions have chased away manufacturers. The region is littered with grand but derelict banks that used to cater to them.

In contrast Marquette, a 110-year-old mutual, is thriving. It has nearly doubled in size since the crisis, to $800 million in assets, and its profits have almost tripled, to $8 million. It has 12 branches, compared to seven in 2007.

Marquette's website features a photo of each branch manager and every foreclosed home put up for sale — there are currently seven. Until the crisis, it followed the "It's a Wonderful Life" model, holding onto the mortgages it had originated instead of selling them to government-sponsored entities, as most banks did.

Marquette's survival, therefore, depended on the quality of its appraisals of borrowers and homes. Its approach was to have a lending officer — accompanied by one of the bank's trustees, in effect board members — visit every mortgage applicant on the Saturday after each application was filed. Customers received fast decisions, while managers and trustees learned a great deal about their clients and market conditions.

Holding onto loans is a risky strategy for a small-town bank, primarily because it ends up extremely vulnerable to a fall in local property prices. Marquette emerged stronger from the crisis in part because property in Erie, which had not enjoyed as much of a boom as the rest of the country, dipped only slightly. Its careful vetting of loans and strong ties to its customers presumably also made a difference.

Given Erie's size — the city and suburbs have a population of 280,000 — Marquette's controls sometimes involved difficult decisions about friends and neighbors. Given its inclement weather, they often involved slogging through heavy snow. As Marquette grew and expanded into an adjoining county, visiting potential borrowers became more arduous.

It was the changing regulatory climate, however, rather than Marquette's growth, that put an end to its assiduity. Its overseers wanted it to sell its mortgages to protect itself from swings in property prices. Moreover, the Federal Reserve has indicated that its policy of suppressing interest rates will not last forever. Higher rates will reduce the value of Marquette's mortgages.

So it has started selling them to the Federal Home Loan Bank of Pittsburgh, part of a 12-bank network that raises money cheaply in the capital markets because of implicit government backing.

The subprime crisis revealed so much slapdash issuance that buyers of mortgages consider valuations provided by the originators worthless. Thus Marquette can no longer conduct its own appraisals. Saturday visits have ended, along with the fast turnarounds on mortgage applications.

It now takes a month.

Marquette's strong results suggest that the changes have not hurt. Then again, defaults are falling across America, thanks to the improved economy. The real test will come with the next downturn.

During the crisis, the Pittsburgh Home Loan Bank lost money on mortgage bonds it had purchased. It is suing Standard & Poor's, the credit-rating agency that had provided a positive evaluation of them. Numerous other entities that purchased mortgages are doing the same.

Meanwhile the old-fashioned way of making sure that loans do not sour — being careful about issuing them — is disappearing.

Bankers have a rough time of it in Hollywood on the whole. Back in 1946, however, "It's a Wonderful Life" depicted the Platonic ideal of a small-town bank, with managers and customers who knew each other and tried to help each other through tough times. George Bailey (James Stewart) was the banker we all wanted to have, and still is.

Most banks pay lip service to such goals, but fall laughably short of them in practice. Marquette Savings Bank, the last remaining lender headquartered in the once-booming industrial city of Erie, Pa., could make a more plausible claim than most ... until distant regulators and policy-makers undermined its personal approach.

A visit to Erie in the months before Christmas reveals two different economies. Canadian shoppers fill the local malls to take advantage of Pennsylvania's lack of sales tax on clothes. Meanwhile high corporate taxes and demanding trade unions have chased away manufacturers. The region is littered with grand but derelict banks that used to cater to them.

In contrast Marquette, a 110-year-old mutual, is thriving. It has nearly doubled in size since the crisis, to $800 million in assets, and its profits have almost tripled, to $8 million. It has 12 branches, compared to seven in 2007.

Marquette's website features a photo of each branch manager and every foreclosed home put up for sale — there are currently seven. Until the crisis, it followed the "It's a Wonderful Life" model, holding onto the mortgages it had originated instead of selling them to government-sponsored entities, as most banks did.

Marquette's survival, therefore, depended on the quality of its appraisals of borrowers and homes. Its approach was to have a lending officer — accompanied by one of the bank's trustees, in effect board members — visit every mortgage applicant on the Saturday after each application was filed. Customers received fast decisions, while managers and trustees learned a great deal about their clients and market conditions.

Holding onto loans is a risky strategy for a small-town bank, primarily because it ends up extremely vulnerable to a fall in local property prices. Marquette emerged stronger from the crisis in part because property in Erie, which had not enjoyed as much of a boom as the rest of the country, dipped only slightly. Its careful vetting of loans and strong ties to its customers presumably also made a difference.

Given Erie's size — the city and suburbs have a population of 280,000 — Marquette's controls sometimes involved difficult decisions about friends and neighbors. Given its inclement weather, they often involved slogging through heavy snow. As Marquette grew and expanded into an adjoining county, visiting potential borrowers became more arduous.

It was the changing regulatory climate, however, rather than Marquette's growth, that put an end to its assiduity. Its overseers wanted it to sell its mortgages to protect itself from swings in property prices. Moreover, the Federal Reserve has indicated that its policy of suppressing interest rates will not last forever. Higher rates will reduce the value of Marquette's mortgages.

So it has started selling them to the Federal Home Loan Bank of Pittsburgh, part of a 12-bank network that raises money cheaply in the capital markets because of implicit government backing.

The subprime crisis revealed so much slapdash issuance that buyers of mortgages consider valuations provided by the originators worthless. Thus Marquette can no longer conduct its own appraisals. Saturday visits have ended, along with the fast turnarounds on mortgage applications.

It now takes a month.

Marquette's strong results suggest that the changes have not hurt. Then again, defaults are falling across America, thanks to the improved economy. The real test will come with the next downturn.

During the crisis, the Pittsburgh Home Loan Bank lost money on mortgage bonds it had purchased. It is suing Standard & Poor's, the credit-rating agency that had provided a positive evaluation of them. Numerous other entities that purchased mortgages are doing the same.

Meanwhile the old-fashioned way of making sure that loans do not sour — being careful about issuing them — is disappearing.